FISCAL/MONETARY REPORT – A YEAR FROM NOW THEY WILL TELL US “WE ARE ALREADY IN A RECESSION, AND THE FINANCIAL CRISIS HAS ARRIVED”

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There are lots of leading indicators and non-correlating numbers coming out of the government agencies that indicate that the economy is much weaker than the 4.9% Q3 GDP print, or even the 1.2% current Q4 estimate indicate. Last week’s October job report, with only 150,000 new jobs, versus estimates of 170-180k, was obviously weak, but it was a lot worse than that. 51,000 of those jobs were added by government, obviously paid for by the taxpayers, leaving only 99,000 jobs in the private sector. A striking aspect of the report is that in October alone 396,000 more people were holding more than one job, so the number of full-time jobs came down dramatically. Equally telling, from April through October, while there were 1.2M jobs theoretically “added”, there were only one hundred ninety-one more individuals working with one job. From a non-correlating standpoint, the Household Survey of new jobs, also produced by the Bureau of Labor Statistics, showed a reduction of 348,000 jobs. FWIW, the unemployment rate (as reported) rose to 3.9%, the highest level since January 2022, against expectations that it would hold steady at 3.8%. Lastly, the previous two months’ reports were revised down by 101,000. No doubt Fed chairman, Jerome Powell, had a pretty good idea what these numbers, released on Friday, would look like, with his slightly more dovish tone two days earlier.

The Fed’s “waiting on the data” conclusion on Wednesday and the jobs numbers released on Friday sparked a short covering rally in both stocks and bonds. Hopefully the Fed’s rear-view mirror will let them know in time what is happening out there in the real world. If they restrict much longer, the hoped for soft landing will become much more serious. Of course, renewed monetary ease will ignite a new round of inflation, but that is always preferable to the alternative.

THE PREDICTABLE LONG TERM DEBT/INTEREST RATE CRISIS HAS ARRIVED

More than a decade of Central Bank control over the cost of capital is in the process of being adjusted, interest rates having gone from zero to about 5% during the last eighteen months. The inevitable “equal and opposite” reaction to more than a decade of interest rate suppression was (sadly) not clear to Janet Yellen, ex Fed-Chair and current Treasury Secretary. She opined in October, 2022 that $31 trillion of debt was no problem because interest rates were “so low”, with the expectation that this would likely prevail for the next decade. Thirteen months later, the debt is $33.7 trillion, rates are close to 5%, and “equal and opposite” has arrived. The fact is that $7.6 trillion of US Debt will mature within 12 months, with an additional $2-3 trillion (from the current deficit) to be financed as well. It is worth noting that, in the last five weeks (from September 30th to November 6th) the total debt has increased by $700B, an annualized rate one heck of a lot more than the current $2 trillion governmental estimate for FY 9/30/24 or our $2-3 trillion range.
Therefore, over the next twelve months at least $10 trillion of US debt will cost 450 basis points more than previously. US interest expense, which ran $659 billion in the fiscal year ending September 2023, will therefore increase by about $37 billion monthly. At current rates the interest expense will be annualizing at more than $1 trillion in only twelve months, and compounding upward. For perspective, total US spending in the fiscal year ending 9/30/23 was $6.1 trillion, with interest expense at 11%. The other largest expenditures were Social Security at 22%, Health at 14%, Medicare at 14%, National Defense at 13%, Income Security at 13%, and Veterans Benefits at 5%. Interest Expense will shortly exceed National Defense, Health and Medicare, only exceeded by Social Security. Because (1) Treasury offerings are so substantial (2) the Fed is additionally offering about $90B per month and (3) China and Japan are reducing purchases, the supply/demand equation points to rates moving higher. Countering this possibility is an economy that is weakening, and the possibility that the Federal Reserve could halt their sales and even resume purchasing. As we’ve said before, our Federal Reserve is not just “the buyer of last resort”. They have become the “only resort”.

Overall, we expect the Fed to reverse course within the next twelve to eighteen months, but interest rates will still be resistant to a decline from current levels, primarily due to the ever-growing supply of debt securities. We continue to expect a “stagflation,” hopefully no worse than that experienced in the ninety seventies. Our crystal ball does not provide a solution to the unprecedented magnitude of current fiscal and monetary problems. Our hope is that someone smarter than ourselves can figure it out.

Roger Lipton